DBRS Morningstar Changes Trend on Ford Motor Company to Positive from Stable, Confirms Ratings at BB (high)

DBRS Limited (DBRS Morningstar) changed the trend on Ford Motor Company’s (Ford or the Company) Issuer Rating to Positive from Stable and confirmed the rating at BB (high). DBRS Morningstar also changed the trends to Positive from Stable for the ratings on Ford’s Long-Term Debt, Revolving Credit Facility, and Senior Unsecured Convertible Debt and confirmed the ratings at BB (high) (with associated recovery ratings of RR4), pursuant to “DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers.” Concurrently, DBRS Morningstar changed the trends on all ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary Ford Credit Canada Company to Positive from Stable while also confirming the long- and short-term debt ratings at BB (high) and R-4, respectively.

The rating actions recognize Ford’s significantly improved earnings generated in 2021, following weaker performance the prior year mainly caused by the impacts of the Coronavirus Disease (COVID-19) pandemic. Moreover, the Company’s credit metrics have been bolstered further by meaningful repurchases of debt that resulted in a reduction of approximately $2.8 billion in (gross) industrial indebtedness as of YE2021 (compared with the prior year). The firmer earnings amid lower debt strengthened Ford's financial risk assessment (FRA) to levels that readily exceed the currently assigned ratings.

Following supply and production constraints in 2020 that were substantially a function of the coronavirus pandemic, production volumes remained significantly limited in 2021 because of the global semiconductor shortage and other supply base challenges. Accordingly, Ford's annual wholesale volumes in 2021 decreased by 6% year over year (YOY) from already weak 2020 levels. However, this protracted shortage of vehicles, spanning more than two years since the initial onset of the coronavirus pandemic, has resulted in high levels of pent-up demand. As such, Ford attained sizable gains in pricing and product mix (the latter significantly reflecting the deliberate allocation of available semiconductors to the production of higher-margin models) that more than offset the aforementioned drop in volumes as well as higher commodity costs. As a result, Ford's core North American automotive segment generated a sound operating margin of 8.4%, with the aggregate (operating) earnings of the Company's other regional segments approaching breakeven levels (compared with meaningful losses incurred in prior years). Ford's automotive earnings were supplemented by very strong performance of Ford Credit, whose 2021 profitability increased substantially YOY in line with favourable lease residual value performance (with auction values attaining record levels because of the extended shortage of vehicles) and reduced provisions for credit losses. In Q1 2022, automotive earnings remained adversely affected by the semiconductor shortage and other supply base challenges (the performance of Ford Credit remaining at strong levels), although these are estimated to progressively improve over the remainder of the year.

In 2021, the Company restructured its industrial indebtedness. Pursuant to its November 2021 cash tender offer and subsequent December 2021 redemption, Ford repurchased or redeemed $7.6 billion of its public unsecured debentures, offset by new issuances of $4.8 billion. While the Company incurred associated transaction costs of approximately $1.7 billion, much of the repurchased debentures constituted high-interest debt (primarily issued in response to the pandemic), with the average interest rate of the newly issued debt being markedly lower. Accordingly, Ford is projected to attain interest cost savings of $0.6 billion in 2022, with aggregate lifetime savings resulting from the debt restructuring estimated at $1.9 billion. As previously indicated, the debt reduction amid earnings growth has resulted in notably improved Company credit metrics.

DBRS Morningstar recognizes that Ford continues to face meaningful challenges. These include ongoing production constraints, although the Company is nonetheless projecting wholesale volumes in 2022 to increase by a range of 10% to 15% YOY. Higher material and commodity costs stand to be exacerbated further as a result of the Russia-Ukraine war, with rising interest rates, inflationary pressures, and greater geopolitical uncertainty possibly undermining consumer sentiment. However, these headwinds are expected to be more than offset by the sizable pent-up demand. Accordingly, Ford is projected to attain meaningful gains in volumes, product mix, and pricing that are estimated to result in materially stronger industrial earnings over the near term, partly offset by a moderation in the profitability of Ford Credit that is nonetheless estimated to persist at strong levels. Although the Company also faces sizable investments and higher product development costs associated with the increasing electrification of its product portfolio, DBRS Morningstar considers these to be reasonably absorbed by Ford's financial profile.

Consistent with the Positive trends, ongoing operating performance of Ford essentially consistent with recent results would likely result in an upgrade. Conversely, significantly weaker earnings amid increasing investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, although DBRS Morningstar deems such a scenario rather unlikely. DBRS Morningstar further notes that the Company's existing FRA affords a sizable cushion in the context of the current ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Automotive Manufacturing and Supplier Industries” (October 14, 2021) was used to evaluate the ratings of Ford, whereas “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (April 4, 2022) was applied to determine the ratings of Ford Motor Credit Company LLC and Ford Credit Canada Company. Finally, “DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers” (August 19, 2021) was applied to estimate the recovery prospects of Ford’s various security lines and assign specific instrument ratings thereto.

The last rating action on this transaction took place on May 17, 2021, when DBRS Morningstar changed the trends on Ford Motor Company’s ratings to Stable from Negative and confirmed the ratings at BB (high).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: October 9, 1997

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021)
https://www.dbrsmorningstar.com/research/385892/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022)
https://www.dbrsmorningstar.com/research/394683/ dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021)
https://www.dbrsmorningstar.com/research/383238/dbrs-morningstar-criteria-recovery-ratings-for-non-investment-grade-corporate-issuers